FYI | Mar 12 2014
By Peter Switzer, Switzer Super Report
A number of subscribers and some attendees at a conference I spoke at last Friday asked me what time it was on the investment clock. So today, I’ll have a crack at telling you what time it is.
When I am asked about how long the bull market will last, I usually answer it using the observation of Sir John Templeton – “Bull markets are born on pessimism (2009-10), grow on scepticism (2011-12), mature on optimism (2013 -2015), and die on euphoria (2016????).”
I think we have two good years left before I will look for the kind of developments that KO a good bull market. The classic sign is inflation, leading to rising interest rates, which then leads to money moving out of stocks into bonds and term deposits. That said, I don’t think rates will be high enough to be a rival for stocks with dividends for at least two years.
This is why I think some time after 2016 could bring a stock market slump. But what does the investment clock say about my speculation?
The recovery stage
This is what Trevor Greetham, the Asset Allocation Director at Fidelity, says about the clock: “The investment clock is spending a second month in the disinflationary recovery stage, because the world economy is experiencing a US-led upturn in growth, as fiscal headwinds ease and confidence returns. At the same time, excess capacity and the slowdown in China are lowering inflationary pressures.”
He likes the lack of inflationary pressure, which should allow the big central banks to maintain relatively easy stances, despite the pick-up in growth. He holds “large overweight positions in developed-market stocks, particularly the US and Japan, as these countries benefit from a stronger US dollar.”
The easiest portrayal of the investment clock was created by my old mates at Bourse Communications (see below). Unfortunately, there are no clear cut current factors that tell you that we are definitely at 8 o’clock, which is rising share prices, because at 9 o’clock we have rising commodity prices. We are past that stage, but if the global recovery kicks in better than expected this year, we could be again at a 9 o’clock position. At 11 o’clock, we have “easier money” and that exists now, as does rising “real estate values”.
It makes me think that in Australia we are somewhere between 9 and 12, with the period of “rising interest rates” ahead of us, followed by falling share prices.
When will it end?
Given this week saw the anniversary of the March 9, 2009 comeback of the stock market, and given a bull market is lucky to last 10 years, I’d say 2016 looks like a good time to get worried about stocks.
I don’t think the USA, nor us here in Australia, will start raising interest rates until year’s end and the Yanks could even wait until 2015. We would then be in the last two years of President Obama and the US stock market is a great riser in the final years of a presidency.
And by then, Europe would be growing and inflation should be kicking up and that’s why 2016 looks like it could be 1 o’clock, and look out for 2 o’clock.
Clearly, the time gaps on an investment clock can be shorter or longer than the period before or after, and I think the rarity of the economic circumstances that has followed the GFC – with easy money policies and central bank action to keep growth going – means that the rising rates period could be slower and longer than times in the past.
And easy money won’t end soon. I’m calling 10:45 but as I say, if I throw in my Templeton view, I won’t be worrying about the time until 2016. So until then I will enjoy higher share and property prices and if I were borrowing for property, I’d be fixing for five years!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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